The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data: Inventories Purchases and Sales Beginning (7,000 units) $14,000 Total net sales (236,000 units) $1,038,400 Ending (21,000 units) Total cost of goods purchased (250,000 units) 596,500 Purchases were made quarterly as follows. Quarter Units Unit Cost Total Cost 1 65,000 $2.20 $143,000 2 55,000 2.30 126,500 3 55,000 2.40 132,000 4 75,000 2.60 195,000 250,000 $596,500 Operating expenses were $150,000, and the company’s income tax rate is 30%. Prepare comparative condensed income statements for 2017 under FIFO and LIFO. GRESA INC. Condensed Income Statements FIFO LIFO $ $ $ $ Answer the following questions for management. (1) Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet? (2) Which cost flow method (FIFO or LIFO) produces the more meaningful net income? (3) Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods?

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Description: The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO m

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter7: Inventories

Section: Chapter Questions

Problem 5PA

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The management of Gresa Inc. is reevaluating the appropriateness of using its present inventory cost flow method, which is average-cost. The company requests your help in determining the results of operations for 2017 if either the FIFO or the LIFO method had been used. For 2017, the accounting records show these data:

Inventories	Purchases and Sales
Beginning (7,000 units)	$14,000	Total net sales (236,000 units)	$1,038,400
Ending (21,000 units)		Total cost of goods purchased (250,000 units)	596,500

Purchases were made quarterly as follows.

Quarter	Units	Unit Cost	Total Cost
1	65,000	$2.20	$143,000
2	55,000	2.30	126,500
3	55,000	2.40	132,000
4	75,000	2.60	195,000
	250,000		$596,500

Operating expenses were $150,000, and the company’s income tax rate is 30%.

Prepare comparative condensed income statements for 2017 under FIFO and LIFO.

GRESA INC. Condensed Income Statements
	FIFO	LIFO
	$	$










	$	$

Answer the following questions for management.

(1)	Which cost flow method (FIFO or LIFO) produces the more meaningful inventory amount for the balance sheet?
(2)	Which cost flow method (FIFO or LIFO) produces the more meaningful net income?
(3)	Which cost flow method (FIFO or LIFO) is more likely to approximate the actual physical flow of goods?
(4)	How much more cash will be available for management under LIFO than under FIFO?	$
(5)	Will gross profit under the average-cost method be higher or lower than FIFO?
	Will gross profit under the average-cost method be higher or lower than LIFO?

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Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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